SEC publishes study on principles-based accounting

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27 Jul 2003

The US Securities and Exchange Commission has released a staff study on the adoption of a principles-based accounting system for US financial reporting.

The study was conducted pursuant to the provisions of Section 108(d) of the Sarbanes-Oxley Act of 2002 and has been submitted to committees in both Houses of the US Congress. The study recommends that accounting standards should be developed using a principles-based approach and that such standards should have the following characteristics:

  • Be based on an improved and consistently applied conceptual framework.
  • Clearly state the accounting objective of the standard.
  • Provide sufficient detail and structure so that the standard can be operationalised and applied on a consistent basis.
  • Minimize the use of exceptions from the standard.
  • Avoid use of percentage tests ("bright-lines") that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.

The SEC study noted that: An additional benefit is the facilitation of greater convergence between US GAAP and international standards. Standard setters can come to an agreement on a principle more rapidly than they can on a highly detailed rule. The benefits of convergence include greater comparability and improved capital formation globally. Click here to go to the Full Text of the Study on SEC Website, or Download a PDF Version (495k), or view the SEC Press Release.

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